The effects from last week’s earthquake and tsunami and the ongoing nuclear crisis in Japan are beginning to disrupt global supply chains. Yesterday, it was reported that GM had to halt production of vehicles at several plants, due to parts shortages from Japanese suppliers. Toyota has suspended production of parts in the mother country that were intended to be shipped overseas. Finally, most Japanese automotive assembly plants remain closed (source: HIS Automotive)

The automotive supply chain is as complex as it gets. There are approximately 20,000 parts in a car, and if only one of those parts is unavailable, then the finished product cannot be shipped. At the top of the pyramid are Tier 1 suppliers that furnish major components, such as engines, that go into a vehicle platform. The Tier 2 suppliers furnish the parts that the Tier 1 suppliers require, such as the piston rod assembly that is part of the engine. As shown in the following schematic, there are typically 3-5 levels in the automotive supply chain, which is comprised by 1,000s of suppliers:

THE AUTOMOTIVE SUPPLY CHAIN

Japanese companies produce many of the components that all OEMs require. For example, the transmissions for the new Chevrolet Volt plug-in-hybrid are sourced from the Land of the Rising Sun. In addition, Japan is a major source of electronic components, furnishing many of the over 30 microprocessors that are found in a typical car. The art and science of managing such a complex global network, spread out over dozens of countries, is challenging even under the best of circumstances. But the Tsunami’s external shocks to the global supply chain are testing the mettle of even the strongest producers. For example, supply chain management at Honda is being stress tested, given that at least 113 of its suppliers are located in the affected areas. As of Tuesday, it had been unable to establish contact with more than 40 of them (Source: Automotive News).

Furthermore, many Japanese components are transported by container ships, which take 30 days to reach U.S. and European docks. So, it is likely that many problems will show up a month in the future when automakers run into parts bottlenecks.

But more than meets the eye is at work here. As reported in Industry Week magazine, the dominant operations strategy of US manufacturers has been Just-in-time (JIT) inventory control or lean operations. Although producers have benefited greatly from these approaches, this latest disaster sheds light on JIT’s inherent risks.

For example, well-functioning JIT systems operate with less inventory, because inventory—in excess of what is needed—is wasteful. Another implication of JIT is reducing the number of suppliers for each component, which results in significant economies of scale. Some firms have reduced the number of suppliers to sole-sources of components. For instance, Somic, a Japanese firm, made all of Toyota’s steering linkages.

But when a critical supplier is unable to produce material, the entire system breaks down. For example, several years ago a fire broke out in Aisin Seiki, a supplier that produced more than 99% of Toyota’s brake valves. Most of the 506 machines used to produce the valve were inoperable. Toyota maintained only a 4-hour supply of the valve, so, the world’s #1 car maker’s production lines quickly shut down. This resulted in Toyota losing production of 70,000 cars. But Saturday after the fire, Toyota and Asin officials summoned many of Toyota’s other suppliers, gave them blue prints, and assigned them the task of making the critical valves. Toyota was able to survive.

But the current calamity has affected not just one sole-supplier of a relatively mundane component designed for a single automotive OEM. Rather, the fate of dozens of factories in northern Japan is unknown. And these firms furnish 100s of different components for many OEMS. In effect, the scale of this current disaster is far more massive than what Toyota encountered with its brake valve.

Clearly, automotive OEMs must rethink risk mitigation strategies to deal with large scale disruptions of their supply chains. There are number of avenues open to them, including:

Challenging suppliers to develop disaster plans so that they can make provisions to move to alternate sites for production, in the event that they are unable to produce product at their main plant.

Eliminating sole-source suppliers, and developing the capabilities of additional companies. Having one supplier is probably too few, but having five suppliers is too many in terms of achieving economies of scale. One strategy would be to give 80% of the work to the primary supplier, and 20% to a secondary vendor that is located in another country. Part of contingency planning should include provisions for ramping up production of the second supplier, in the event of a calamity.

Analyzing where suppliers are located, and limiting the number of critical component suppliers that are geographically situated in a risky area. For example, an analysis of Volvo’s supply chain indicated “10% of their parts came from 33 Japanese suppliers, 7 of which were located in the catastrophe area,” according to the New York Times.

Review insurance policies and consider taking-out contingent business interruption insurance that protects against losses relating to the inability of suppliers to deliver. Although some of the OEM’s had this coverage, the WSJ suggested that there were so many limitations and exclusions attached to their policies that claims will probably be insignificant.

In light of Japan’s deepening nuclear crisis, it is time that global manufacturers reassess the design of their networks to mitigate against risks associated with large scale disasters. Those suppliers that do reassess their supply chains, can only benefit by reducing their exposure to the next calamity that will surely occur.

What other actions could be taken to reduce risks in the operation of a global supply network?

The U.S. coffin manufacturing industry, like so many other domestic goods producing industries, has undergone hard times. First of all, people are living a lot longer. Thus, demand for caskets has declined. Second, more people are choosing cremation rather than opting for the traditional—and more expensive—burial. Finally, customers are buying less expensive coffins from China. All of these factors combined have dampened demand. U.S. casket sales peeked by volume in 2000 at 1.9 million. Since then, they have declined by 11%, to 1.69 million in 2009. (Wall Street Journal).

Despite these trends, the Batesville Casket Company has been able to survive, even prosper.

Symbol of the Company That Pioneered the Toyota Production System (TPS)

And they have done so, in part, because in 1995 they adopted the Toyota Way—known also by such names as the Toyota Production System (TPS), just-in-time (JIT), lean operations.

The Toyota Way—as originally conceived by Toyota Motor Corporation—is focused on the elimination of all waste from the automobile manufacturing process. Here are the 7 typical wastes, or inefficiencies, which are part of anymanufacturing or service process:

Overproduction

Waiting time

Unnecessary transport or conveyance

Overprocessing or incorrect processing

Excess inventory

Unnecessary movement

Defects

This lean philosophy has been used to reconfigure the assembly line at the Batesville plant in Manchester, Tennessee. Using touch screen computers and bar codes, the workers on the line assemble 1,000 custom caskets per day, choosing from 22 possible colors along with thousands of personalization options. The assembly line has been reconfigured into a pull system, where material is ordered only when it is needed by the customer. 98% of the 224 parts that go into assembling a coffin are produced on site.

Reduction of waste and defects can be accomplished by simplifying processes. The Manchester plant employs visual signals that facilitate ordering the correct materials. In an article in the Atlantic Monthly, Mary Jo Cartwright, the plant’s director of operations, described how a new worker to the interiors line asked about how she was suppose to do her job of resupplying the seamstresses. “Visual displays were everywhere; sheer material for mattresses and canopies hung from color-coded racks that simply needed to be matched with corresponding colors. ‘This is kindergarten,’ the worker said.”

Improving the efficiency of a process can also be achieved by substituting technology for labor. Previously, a worker lifted the 65 lb lid of each casket over 500 times a day. Batesville improved worker safety—while simultaneously increasing productivity—by replacing several people with two giant robotic arms.

As a result of the adoption of lean operations, the Manchester plant has reduced manufacturing costs by 25% over the past 15 years. At the same time, the labor hours required to build a coffin have been reduced by 40 percent. (Industry Week)

The practice of continuous improvement (kaizen in Japanese) isanother element of just-in-time. It is the belief that “there is no best, only better.” The Manchester, Tennessee factory’s 370 associates—the term that the company uses to describe its factory workers—are empowered to improve their work on a daily basis. In 2008, two busloads of Batesville Casket Company employees traveled to Georgetown, Kentucky to study how the line workers participate in continuous improvement.

Rather than trying to hit the big home run, the workers at the Batesville Casket Co. attempt to hit many singles: they are empowered to focus on improving their work, day-in and day-out. In terms of output quality, the continuous improvement philosophy has paid off in spades. In 1999, 20% of the caskets produced had a defect; today, the numbers of defects coming off the line are less than 1%.

Waste elimination and continuous improvement are two of the pillars of the Toyota Way. But the final, foundation-piece required is Respect for People. The employees are the ones who have the best ideas for improving their job processes; yet, if, as a result of a suggestion, an employee is “laid off,” what motivation would anyone have for making recommendations for process improvement? The workers at the Manchester, Tennessee factory are represented the United Steelworkers union. At this site, management agreed that no factory associate would lose their job as a result of a kaizen event, which is a workshop that challenges a cross functional team to design or improve a designated process. This promise—coupled with the reality that the home office is closing plants that are inefficient—-has resulted in the realization that success requires that everyone must work together.

Toyota Motor Corporation stumbled in 2010, losing its way by recalling over 10 million vehicles. Despite this reality, the business philosophy that Toyota developed—today known as lean operations—is still valid. The top management team in Toyota City, Japan have simply taken their eye off the ball.

In addition to becoming the dominant operations strategy of US manufacturers, lean operations is rapidly being adopted by the service industry as well. Batesville Casket Co., the worlds’ #1 casket manufacturing company, is a good example of the success of this strategy. Last year’s sales and profits were $749 million, and $111 million, respectively. For a dying industry, lean is the precise remedy that any good doctor would order.